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Case Study

A Bridge Too Dear

Prof Ian Giddy
New York University

In early 2005 the private equity group at Goldman Sachs was working with the Danish management team of the world's largest cleaning services company, ISS, to arrange a leveraged buyout of their company. A group of private equity investors had offered to provide DKK 9,675 million towards the purchase price, and there were sufficient assets to support another DKK 7,693 million of senior debt. The remainder of the purchase price, however, was to be provided in the form of bridge loans. After initial discussions, a syndicate of banks led by Citigroup proposed two bridge loan facilities. Their intention was that, within less than a year after the buyout, one part of the bridge would be refinanced by issuing PIK (pay-in-kind) notes, and the remainder with a high-yield bond issue.

Several banks and hedge funds had shown an interest in providing the bridge loans. They argued, however, that the aquisition was heavily leveraged and that they needed protection in case the refinancing proved difficult. The lenders were insisting on building in penalty features that would encourage ISS to repay the bridge into permanent financing as quickly as possible. The terms the lenders proposed were as follows:

ISS Bridge Loans

Assignment:

The management and sponsors were concerned about the cost of these loans, and about the uncertainty of refinancing them. 

(a) What was the initial cost of the bridge financing?
(b) Show, by means of a graph, how the costs of the bridge loans would change over time if they are not refinanced.
(c) What could go wrong with the refinancing of the bridge loans?
(d) What alternative, if any, does ISS have?


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